Friday, 17 November 2017

Saudi Arabia Exposes itself to ‘Rating Addiction’

This very short commentary, the first of two posts today,
reacts to the news that Standard & Poor’s (S&P), the world’s leading
credit rating agency, is to open a branch in Riyadh, the capital of Saudi
Arabia. Only very recently did we discuss the recent developments within Saudi
Arabia here
in Financial Regulation Matters and,
as part of that push to reorganise under the ‘Vision 2030’ banner which is being
developed by the Crown Prince, the oil-rich state is attempting to move into
the financialised marketplace more; the effect of this will be remarkable for
the growth of the country, but will also open it up to the iniquities of the
marketplace that plague their Western colleagues; the parasitic emergence of
S&P just before Saudi Aramco is floated and the country begins its move
away from petro-dollars is no coincidence. The question, then, is what exactly
is the country letting itself in for?

Saudi Arabia’s push to move away from oil-dependency makes
complete sense in light of the fact that the resource is a finite resource.
Yet, what they are exposing themselves to in doing so is something which they
have likely not encountered before. The mercenary nature of the large rating
agencies means that the Saudis are introducing the perfect cocktail for
financial ruin to their border, and further, by way of a clear thirst to
encourage investment, and a regulatory framework that has no experience of dealing
with these venal companies. The pressure the CMA will be under to allow the
rating agency as much flexibility as it can with its methodologies, it approach
and its compliance, will be considerable owing to the need for the turnaround to
work. Then, further, as this author discusses in a forthcoming article and
monograph, the country will be catapulted into a vicious cycle of what is known
as ‘rating addiction’ whereby the agencies become systemically intertwined and,
effectively, remove themselves from deterrent and punishment.

So, what may be the answer for the Saudis? The push to
change direction is valid, but it must be done with great care, and in this
particular field that does not appear to be the reality of the situation. The
regulators are beckoning, even seducing these companies into the country whilst
what they should be doing is developing the strongest framework possible, based
upon foreign experience and assistance, so that their fragile social revolution
is protected from the iniquities of the marketplace. There is a great risk for
the Saudi leadership in constructing and executing this social revolution, and
they would be minded to take great care when inviting the fox to the hen house.

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